InoCC Chapter 3. Katherine Wang

Notes

• A state of rest, self-prepetuating in the absence of any outside disturbance.
• Economists consider where equailibria change and the reasons why the changes take place.
• They then use the information to perdict changes in equalibirum situation that may be cause by a certain action
• They may begin to formlate economic policy

• Outside disturbance is the change in one of the determinants of demand or supply, other than the price of the product, which would lead to a shift or either of the curves.
• Whenever there is a shift of demand or supply curve, the market will, if left to act alone, adjust to a new equalibrium, market-clearing, price.

• If there is an increase in the price of good, due to an increase in deamdn for the good, then this gives a "signal" to producers that consumers wish to purchase more this good. To maximise their profits, then rational producers will allocate more resources towards those goods where the demand is highest.
• The increase in price is the only signal that create the incentive for the producers to produce more of the good.

• Consumer surplus
  • he extra satisfaction (or utility) gained by consumers from paying a price that is lower than that which they are prepared to pay.
  • The total consumer surplus is usually shown by the area under the demand curve and above the equilibrium price
• Producer surplus
  • The excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output.
  • The total producer surplus is usually shown by the area under the equilibrium price and above the supply curve.
• Allocative efficiency
  • When market is in equalibrium with no external influences and external effect.
  • Resources are allocated in the most efficient way from society's point of view.
  • Productive efficiency is producing the maximum output with a given level of input.
  • The sum of consumer and producer's surplus is community surplus.
  • The point of equilibrium is the point that community surplus is maximised
  • When costs of industries equals to costs to society, we call it the marginal social cost curve (MSC)
  • When the benefits int he market are equivalent to the benefits to scoeity, it is the marginal social benefit curve (MSB)

• Taking the demand and supply function, we are able to derive demand and supply schedule
• Calculating the equilibrium price and equilibrium quantity demand and supplied, illustrated on a graph